When Advice Is Missed, Clients Act Out of Fear

Turbulent markets continue to rattle investors, prompting
financial advisers to rank “managing market volatility” as their top concern
for Q1 2016, according to a new survey published by Eaton Vance.

The 123.8 reading for “managing market volatility” in this update of the Advisor
Top-of-Mind Index (ATOMIX) is the highest ranking since the index originated in
April 2014. Just as telling, the survey found that 80% of financial advisers report fear is the primary motivator for
their clients, up dramatically from 51% in Q1 2015.

Nearly half (47%) of the
1,000-plus advisers polled said they are focused primarily on counseling
clients to stay the course through volatile periods and adhere to
established plans. Hoping to re-focus clients on aspects over which they
have greater control than market performance, a sizable portion of advisers are
taking time to remind clients that it’s tax time. Especially for clients that have moved large sums of money
between or out of different types of retirement accounts, this is an important time
of the year to get it right.

Looking ahead, still less than half (44%) of financial advisers
polled “believe the likelihood of a U.S. recession by year-end is either
moderate or high.” According to Eaton Vance researchers this underscores their
growing trepidation over the pace and direction of global growth. John
Moninger, managing director at Eaton Vance, believes the volatility spike in
the latter part of 2015 and the emotional reaction many investors had to it “may
be leading to investment actions that work against their long-term goals.”

“Market volatility is an output of investor sentiment and
history suggests that dislocations caused by volatility can present compelling
opportunities for investors who remain calm, evaluate the fundamentals and take
a long-term approach to their portfolios,” Moninger explains.

NEXT: Staying the
course … or not

Advisers are certainly already aware that investors can be
tempted to diverge from a buy-and-hold mentality during periods of heightened
volatility, Moninger notes. What they may be less convinced of is the power
of a quick reminder of the basic lesson that short-term volatility is the price of long-term gains in the equity markets.

“Advisers can provide invaluable guidance to their clients
by instituting a sound investment strategy and then effectively communicating
the value of sticking to that strategy, especially when clients are fearful,”
he says. The research suggests one clear way advisers can help
clients act prudently in volatile markets is to focus them on their tax bills.

“Tax management consistently ranks lowest on the ATOMIX
survey, suggesting that many investors do not fully understand the impact taxes
can have on total return,” Moninger adds. “In fact, six out of 10 advisers
(61%) reported that they do not believe their clients even know the effective
tax rate on their investments. Tax-conscious investors should consider how they
can get ahead of tax bills and focus on tax management throughout the year
instead of only in the fourth quarter or around Tax Day.”

Also interesting, while 45% of advisers stated they harvest
client losses annually, only 3% do so monthly and 17% do so on a quarterly
basis.

NEXT: What comes next
with interest rates?

“While interest-rate speculation contributed to market
volatility in 2015, the December rate hike has led to general consensus among
advisers about the pace of future hikes,” the survey report explains. Despite
the fact that the Federal Reserve has already passed on one opportunity to hike rates further in 2016,
72% of advisers “believe there will be several small rates hikes in 2016.”

Advisers continue to diverge on how to best prepare client
portfolios for a rising rate environment, identifying multisector, municipal,
floating rate and high-yield bonds as potential solutions for their clients.
Fifty-five percent also noted that they are moving their clients into equity
strategies in an effort to combat the impact of rising rates.

“Ultimately, clients are telling their advisers that they
are nervous about the economy, interest rates and what market volatility will
do to the assets they have spent a lifetime working to accumulate,” Moninger
concludes. “Financial advisers can clearly define the value they bring by
helping their clients stay focused, invested and opportunistic through
challenging markets and over time.”

The ATOMIX is created in partnership with third-party
researchers and calculated based on the findings of a survey of 1,000 financial
advisers, coming “from a diverse group of companies.” The firm says ATOMIX “uses
a similar methodology as the U.S. Consumer Confidence Index … in that it
calculates a weighted average of current perceptions (40% of the Index) and
what advisers think about the trends (60% of the Index).”